Outsourcing Theory
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  • 1. Outsourcing: What’s the Theory? 1 Gordon M. Groat PhD (abd), MSc, BGS, ASc
  • 2. Predominant Theory 2  Resource Based View (RBV)  Transaction Cost Economics (TCE)  Total Cost of Outsourcing (TCO)  Agency Theory  Negative Curvilinear Model (Adjusting Outsourcing on the X and Y axis) Theory Lit + Lit -
  • 3. Lit Review: Outsourcing Advantages 3  Strategic Focus / Reduction of Assets  Complimentary Capabilities / Lower Production Costs  Strategic Flexibility  Avoiding Bureaucratic Costs  Relational Rent Theory Lit + Lit -
  • 4. Lit Review: Outsourcing Disadvantages 4  Interfaces / Economies of Scope  Hollowing Out  Opportunistic Behaviour  Rising Transaction & Coordination Costs  Limited Learning & Innovation Theory Lit + Lit -
  • 5. Strategic Focus & Reduction of Assets 5  Shifting cost of production leveraging an outsourcing model frees up assets that the outsourcer now provides… i.e. the infrastructure costs, etc.  Why is this a good thing?  It allows the organization to redeploy freed up assets to other strategic areas or the organization can redistribute savings to shareholders – in either event, a win with the investing community (share price) Theory Lit + Lit -
  • 6. Complimentary Capabilities & Lower Production Costs 6  Outsourcing can remove a fixed cost from production thus raising profitability  Outsourcers often have more efficient production processes – allowing them to produce at a cost savings compared to internal production… enhanced profitability PLUS core competency… i.e. it’s what the Outsourcer does best. Theory Lit + Lit -
  • 7. Strategic Flexibility 7  By using outsourcers – it’s easier to switch from one outsourcer to another  Organization can increase or decrease supplies from various outsourcers (supply channels) in response to “external shock”  Reduces the need to “retool” or “restructure” due to economic changes and market changes  European – flexibility reservoir  Japanese – Inimitable supply chain where there is an obligation to the well being of the supplier Theory Lit + Lit -
  • 8. Avoiding Bureaucratic Costs 8  There is no competitive incentive associated with internal production and thus – rising price base is associated with internal production  Lack of Price Mechanism  Lack of Economic Incentives Theory Lit + Lit -
  • 9. Relational Rent 9  Building Idiosyncratic and valuable relationships with suppliers enables Innovation and Learning, which in turn, produces efficiencies that reduce transaction costs  SEE TOYOTA PRODUCTION Theory Lit + Lit -
  • 10. Toyota Supplier Relations 10  Toyota Supplier Relations are widely studied as a model with a sustainable advantage where the relationship is deep and extensive… often including the following ties:  Historical  Social  Interpersonal Theory Lit + Lit -
  • 11. Interfaces / Economies of Scope 11  Sometimes there is a point in the value chain that manifests at key strategic intersections, for example R&D, Manufacturing, and Marketing  If there are important interfaces adding to the Value Chain – then splitting up these processes to Outsourcing may not be the best course of action Theory Lit + Lit -
  • 12. Hollowing Out 12  Firms that outsource many activities can sometimes give up their competitive edge.  Firms can loose bargaining power vis-à-vis suppliers because the capabilities of suppliers increase relative to those of the firm Theory Lit + Lit -
  • 13. Opportunistic Behaviour 13  Opportunistic behaviour allows suppliers to extract greater rents from a relationship than they would normally do  i.e. Gaming the Contract Theory Lit + Lit -
  • 14. Rising Transaction & Coordination Costs 14  External Span of Control issues  Managers have a limited amount of time to dedicate to managing relationships with outsourcers  Too much outsourcing throws this issue into a TCE/TCO discussion as the value of outsourcing is chipped away by managerial costs to run the business Theory Lit + Lit -
  • 15. Limited Learning & Innovation 15  If the firm itself is not able to do the business process, how is it able to derive learning from the process? Theory Lit + Lit -
  • 16. Transaction Cost Economics (TCE) 16  Production costs are lower in “markets” than in organizations because of allocative efficiencies – this leads to inter-firm division of labour  Transaction Costs are the costs of “running” the economy… in the case of BPO, the cost of monitoring mechanisms to prevent opportunistic behaviour Theory Lit + Lit -
  • 17. Total Cost of Outsourcing 17  Extrapolates TCE to include the perspective of Williamson and then captures the costs of managing the economy… this elevates the “Make or Buy” decision to a different level apart from the basic contractual “cost” of service items. Theory Lit + Lit -
  • 18. Resource Based View 18  Competitive Advantage is present when controlling resources that have certain characteristics:  Valuable  Rare  Inimitable  Hard to Substitute Theory Lit + Lit -
  • 19. Agency Theory 19  Outsourcer commissions work from the supplier (agent)  Works well when there is strong alignment between both parties  Where alignment is not possible, Vertical Integration is preferred Theory Lit + Lit -
  • 20. Negative Curvilinear Model 20 Activity A B C D E F G H I Performance Gain -4 -3 -2 -1 0 1 2 3 4 from Outsourcing Negative Curvilinear xy Performance Graph 6 Number of Outsourced 5 4 Activities 3 2 1 0 0 2 4 6 8 10 Perform ance Theory Lit + Lit -
  • 21. Projections 21  BPO market posting continued growth  Shifting regional patterns  Increased competition proliferates alternatives  Value add shift from simple BPO to more complex relationships (i.e. BPO to BTO) Theory Lit + Lit -
  • 22. World Class Partners 22 Asia Pacific Contact Center India’s Most Respected Vendor of the Year 2007 BPO Company Best in Show Awards for Best Offshore Solutions Provider - 14th Annual International Call Center Management Conference & Exposition Best Outsourcer 14th Annual International Call Center Management Conference & Exposition Theory Lit + Lit -
  • 23. Outsoucing Costs // TCE 23  Call Center Employee Cost 2006 Data Set (collected 2005)  USA US$ 19,000 annually  Australia US$ 17,000 annually  Philippines US$ 9,050 annually  India US$ 7,500 annually Theory Lit + Lit -
  • 24. What does it mean for ME? 24  By enabling internal Core Competencies to shine we set ourselves up to deliver a better product to market more efficiently  By managing our Outsourcing arrangements well, we are able to enhance our profitability  The more money the enterprise earns- the more money there is to grow the business Theory Lit + Lit -
  • 25. Core Activities in an Outsourcing Decision Model 25 (1) the company core (all activities which are necessarily connected with a company's existence) (2) core-close activities (directly linked with core activities) (3) core-distinct activities (supporting activities) (4) non core activities (activities with general availability) Theory Lit + Lit -
  • 26. Questions 26 Theory Lit + Lit -
  • 27. 27 Theory Lit + Lit -